Blink Outlook Warrants Further Valuation Downgrade
Led by lower volume, Ramkrishna Forgings (RFL) has delivered a weak performance in 1QFY20 with its revenue declining by 8% YoY and 14% QoQ to Rs3.8bn (vs. our estimate of Rs3.9bn). Its volume declined by 14% YoY and 6% QoQ to 28,558 tonne owing to slower M&HCV sales in the wake of higher axle load norm, production cut by OEMs and ongoing economic slowdown. While EBITDA dropped by 17% YoY and 19% QoQ to Rs722mn (slipping our estimate by 4%), EBIDTA margin contracted by 204bps YoY and 112bps QoQ to 19% owing to 100bps YoY (-235bps QoQ) rise in RM/sales to 49.8%, despite 25bps YoY reduction in other Expenditure/Sales to 24.8%. However, staff cost/sales increased by 130bps YoY and 75bps QoQ to 6.4% due to negative operating leverage, which dragged margin. Better product-mix with higher machining and strong exports nullified the impact of lower domestic sales to some extent, as per management. Its PAT declined by 51% YoY and 46% QoQ to Rs135mn (vs. our estimate of Rs165mn) due to double-digit volume decline. Realisation/tonne grew by 7% YoY
Company Expects Strong Recovery in 2HFY20; Tough Time Ahead
RFL derives >85% of its total revenue from automotive segment (including exports), while its management did not give any clear guidance on revenue front. It expects strong recovery in 2HFY20 on the back of pre-buying ahead of BS-VI implementation. The Company has maintained its long-term positive view on volume and revenue with the likely stimulus from the government for the automobile sector, pre-buying as well as decent CV sales from North America. The Management expects export contribution from Europe to increase to 30% from the current level of 10%, going ahead. RFL plans to diversify into new segments of PVs and LCVs in order to reduce dependence on cyclical CV business. We expect down-cycle for the automobile industry in FY21 and slowdown in North America Class 8 demand over the next 2 years. We also expect RFL’s EBIDTA margin to contract by 70bps over FY19-FY21E to 20.3% due to likely squeeze in margin of vendors by the OEMs during the down-cycle.
Outlook & Valuation
Lowering our volume estimates, we expect RFL’s volume to clock just 1% CAGR over FY19-FY21E. We decrease our revenue and EBIDTA estimates by 17%/11% and 17%/10% for FY20E/FY21E and reduce our EPS estimate by 28%/8% for FY20E/FY21E. The Management has indicated lower capex for FY20E, assuming lower demand, which signifies concern for the domestic M&HCV industry’s growth in the coming years. Further, heavy truck orders are slowing down in North America indicating lower production in future. Considering volume decline during down-cycle for M&HCV, likely slowdown in export market, margin pressure and reducing return ratios we lower our P/E valuation multiple to 12x (from 13x earlier) and maintain our REDUCE recommendation on the stock with a revised Target Price of Rs395 (from Rs465 earlier), valuing it at 12xFY21 EPS.
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